Supply Chain Integration and e-Business Strategies

1. Supply Chain Integration and e-Business Strategies Ranjan Ghosh Indian Institute of Management Calcutta

2. Outline • Review • Supply Chain Dynamics • A new Supply Chain Paradigm • Matching Products with Strategies • e-Business Opportunities

3. Retailer Orders Distributor Orders Production Plan The Dynamics of the Supply Chain Customer Demand Order Size Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

4. Production Plan The Dynamics of the Supply Chain Customer Demand Order Size Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

5. What are the Causes • Promotional sales • Volume and Transportation discounts • Batching • Inflated orders • Demand Forecast • Long cycle times • Lack of Visibility to demand information

6. Consequences • Increased safety stock • Reduced service level • Inefficient allocation of resources • Increased transportation costs

7. The Bullwhip Effect:Causes thereof • Variability in customer orders • Delivery lags, particularly long cycle times • Information lags • Promotional Campaigns/Variation in Prices • Over and Under Ordering • Lumpiness in ordering • Misperceptions of feedback • Chain accumulations

8. The Bullwhip Effect:Managerial Insights • Exists, in part, due to the retailer’s need to estimate the mean and variance of demand. • The increase in variability is an increasing function of the lead time. • The more complicated the demand models and the forecasting techniques, the greater the increase. • Centralized demand information can reduce the bullwhip effect, but will not eliminate it.

9. Coping with the Bullwhip Effect in Leading Companies • Reduce Variability and Uncertainty - POS - Sharing Information - Year-round low pricing • Reduce Lead Times - EDI - Cross Docking • Collaborative Channel Management & Alliances • Vendor managed inventory • On-site vendor representatives

10. The Future is Not What it Used to be • Reduce cost • Increase Profit • Increase service level • Increase flexibility • A new Business Model e-

11. Reality is Different….. • Peapod Example • Founded 1989 • 140,000 members, largest on-line grocer • Revenue tripled to $73 million in 1999 • 1st Quarter of 2000: $25M Sales, Loss: $8M • Amazon.com Example • Founded in 1995; 1st Internet purchase for most people • 1996: $16M Sales, $6M Loss • 1999: $1.6B Sales, $720M Loss • 2000: $2.7B Sales, $1.4B Loss • Last quarter of 2001: $50M Profit • Total debt: $2.2B

12. Reality is Different…. • Dell Example: • Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999)

13. Reality is Different…. • Cisco Example: • Cisco’s Internet based business model has been instrumental in our ability to quadruple in size from fiscal 1994 to fiscal 1998 ($1.3B to over $8B), hire approximately 1000 new employees per quarter and saving $560M annually in business expenses (Peter Solvik, CIO Cisco)

14. The e-Business Model • e-Business is a collection of business models and processes motivated by Internet technology, and focusing on improving the extended enterprise performance • e-commerce is part of e-Business • Internet technology is the driver of the business change • The focus is on the extended enterprise: • Intra-organizational • Business to Consumer (B2C) • Business to Business (B2B)

15. A new Supply Chain Paradigm • A shift from a Push System... • Production decisions are based on forecast • …to a Push-Pull System

16. From Make-to-Stock Model…. Suppliers Configuration Assembly

17. Demand Forecast • The three principles of all forecasting techniques: • Forecasts are usually wrong • The longer the forecast horizon the worst is the forecast • Aggregate forecasts are more accurate • The Risk Pooling Concept

18. A new Supply Chain Paradigm • A shift from a Push System... • Production decisions are based on forecast • …to a Push-Pull System

19. PUSH STRATEGY PULL STRATEGY High Uncertainty Low Uncertainty Push-Pull Boundary Push-Pull Supply Chains The Supply Chain Time Line Customers Suppliers

20. A new Supply Chain Paradigm • A shift from a Push System... • Production decisions are based on forecast • …to a Push-Pull System • Parts inventory is replenished based on forecasts • Assembly is based on accurate customer demand

21. ….to Assemble-to-Order Model Suppliers Configuration Assembly

22. Business models in the Book Industry • From Push Systems... • Barnes and Noble • ...To Pull Systems • Amazon.com, 1996-1999 • And, finally to Push-Pull Systems • Amazon.com, 1999-present • 7 warehouses, 3M sq. ft.,

23. Direct-to-Consumer:Cost Trade-Off

24. Industry Benchmarks:Number of Distribution Centers Food Companies Chemicals Pharmaceuticals Avg. # of WH 3 14 25 - High margin product - Service not important (or easy to ship express) - Inventory expensive relative to transportation - Low margin product - Service very important - Outbound transportation expensive relative to inbound Sources: CLM 1999, Herbert W. Davis & Co; LogicTools

25. e-Business in the Retail Industry • Brick-&-Mortar companies establish Virtual retail stores • Wal-Mart, K-Mart, Barnes and Noble • Use a hybrid approach in stocking • High volume/fast moving products for local storage • Low volume/slow moving products for browsing and purchase on line • Channel Conflict Issues

26. E-Fulfillment Requires a New Logistics Infrastructure

27. Wal-Mart’s e-fulfillment Strategy • Wal-Mart has always prided itself in its in-house distribution operations. • Thus, it was a huge surprise when the company announced that it plans to hire an outside firm to handle order fulfillment and warehousing for it’s on-line store Wal-Mart.com, which the retailer launched in the fall of 1999. • Filling orders behind the scenes of Wal-Mart’s cyberstore is Fingerhut Business Services. Fingerhut will provide Internet order fulfillment, warehousing, shipment, payment processing, customer service and merchandise returns.

28. Demand uncertainty (C.V.) Pull Push H L I Computer II IV III Delivery cost Unit price L H Economies of Scale Pull Push Matching Supply Chain Strategies with Products

29. Locating the Push-Pull Boundary

30. Organizational Skills Needed Raw Material Customers Push Pull High Uncertainty Short Cycle Times Service Level Responsiveness Low Uncertainty Long Lead Times Cost Minimization Resource Allocation

31. e-Business Opportunities: • Reduce Facility Costs • Eliminate retail/distributor sites • Reduce Inventory Costs • Apply the risk-pooling concept • Centralized stocking • Postponement of product differentiation • Use Dynamic Pricing Strategies to Improve Supply Chain Performance

32. e-Business Opportunities: • Supply Chain Visibility • Reduction in the Bullwhip Effect • Reduction in Inventory • Improved service level • Better utilization of Resources • Improve supply chain performance • Provide key performance measures • Identify and alert when violations occur • Allow planning based on global supply chain data